Question 4 ( 10 marks)

a) What does the term 2/10, net 30 mean? (1.5 marks)

b) Explain how a negative cash conversion cycle arises. (2 marks)

c) Use the following information to answer the questions.

HanKook Motor Corporation Income Statement (in $ millions) For the years ending 31 December

2018 2019 Sales $85,000 $100,000 Cost of goods sold 75,000 85,000 Gross profit $10,000 15,000 Selling, general, admin expenses 7,000 9,000 Operating profit $3,000 $6,000 Interest expense 1,200 1,100 Profit before tax $1,800 $4,900 Taxes 540 1,470 Net profit $1,260 $3,430

HanKook Motor Corporation Balance sheet (in $ millions) For the years ending 31 December

2018 2019 2018 2019 Assets Liability Cash $3,080 6,100 Account payable $3,600 $4,600 Accounts receivable 2,800 6,900 Notes payable 1,180 1,250 Inventory 6,200 6,600 Accruals 5,600 6,211 Total current assets $12,080 $19,600 Total current liabilities $10,380 $12,061 Net plant, property And equipment $23,087 $20,098 Long-term debt $6,500 $7,000 Total assets $35,167 $39,698 Total liabilities $16,880 $19,061 Equity Issued equity $2,735 $2,735 Retained earnings $15,552 $17,902 Total equity $18,287 $20,637 Total liability and equity $35,167 $39,698

i) Calculate the cash conversion cycle (CCC) for HanKook for both 2018 and 2019. (2 marks)

ii) All else being equal, how does this change affect HanKooks need for cash? (1 mark)

iii) HanKooks suppliers offer terms of net 25. Is HanKook doing a good job of managing its accounts payable? Why or why not? (2 marks)

d) What is the effective annual cost of credit terms of 1/10 net 30, if the firm stretches the account payable to 45 days? (1.5 marks)